Moody’s downgrades Gabon’s rating to B3, outlook negative

LIBREVILLE (Capital Markets in Africa) – Moody’s Investors Service has today downgraded the long-term issuer and senior unsecured debt ratings of the government of Gabon to B3 from B1 and maintained the negative outlook.

Concurrently, Moody’s has lowered the government of Gabon’s local currency as well as foreign currency bond and deposit ceilings to Ba3 from Ba1. The rating downgrade drove the change in ceilings.

Rating Rationale
The key drivers behind the downgrade to B3 are:

1) Deteriorating public finances due to persistently low oil prices and limited policy adjustment capacity

2) Acute government liquidity pressures, as exhibited by the accumulation of arrears

The negative outlook reflects uncertainties regarding the government’s strategy to refinance maturing debt and fund its deficit despite support from official creditors, which remains conditional.

Deteriorating Public Finances
The oil price shock has led to a marked drop in Gabon’s government revenue to 17% of GDP in 2016 from 30% in 2013. As revenues decreased, the government faced a difficult policy trade-off between cutting expenditure, especially capital spending, which peaked at 7% of GDP in 2014, and supporting its non-oil economy. While fiscal deficits have been relatively limited on a cash basis to about 5% of GDP on average over 2015-16, this has been to the detriment of the government’s accumulation of arrears. In turn, government arrears have affected non-oil economic activity, disrupting in particular cash-flows for goods and services providers to the government.

Gabon government debt has deteriorated too, rising to 55% of GDP in 2016 from 33% in 2014, excluding accumulated arrears but including 5% of GDP in debt vis-à-vis the central bank (BEAC) of the Economic and Monetary Union of Central Africa (CEMAC). During that period, the government contracted private sector debt to cover some of its financing needs, with the issuance in June 2015 of 10-year $0.5 billion notes as well as debt issuances on the regional market of the CEMAC. Private sector debt — Eurobonds, loans from commercial banks and domestic debt, excluding the debt owed to the BEAC — represented an estimated 77% of the total government debt at the end of 2016.

While fiscal deficits should narrow going forward as part of the macroeconomic framework agreed with the IMF under the recently approved Extended Fund Facility, the clearance of arrears will weigh on the government’s cash balance, perpetuating the upward debt trajectory. Moody’s projects the Gabon government debt level to reach 57% of GDP in 2017.

Acute Government Liquidity Pressures
The accumulation of arrears by the government is symptomatic of rising liquidity pressures — i.e. the difficulty of the government to meet payments due to constrained financing sources. That said, the government of Gabon still had 2.6% of GDP in fiscal reserves at end-2016. Going forward, persistently low oil prices, the necessity to clear arrears under an IMF program in order to revive the non-oil economy, will weigh on government net financing needs which Moody’s expects to peak at 12-15% of GDP in 2017 or even higher should the government’s fiscal consolidation does not meet its target.

Faced with such large financing needs as well as associated pressures on the balance of payments, the government of Gabon had to resort to an IMF program that provides $642 million (4.6% of GDP) in financing under the Extended Fund Facility (EFF). The EFF plays a catalysing role for other external financing from the official sector with the aim to close any financing gaps. That being said, disbursements will remain contingent upon the government of Gabon meeting the conditions set by the program. Given the country’s weak institutions, the implementation of the EFF faces execution risk.

Negative Outlook
While the IMF program will progressively help the government of Gabon in arresting the deterioration in public finances and closing financing gaps, downside risks remain regarding the government’s strategy to refinance maturing debt and fund its deficit.

The capacity of the government to roll-over its domestic debt, which reached an estimated 12% of GDP at the end of 2016, is constrained due to shallow regional markets in the CEMAC and the increased demand for financing emanating from the other CEMAC member countries as five, out of six, are net oil exporters concurrently facing various degrees of liquidity pressures. Offers on Gabon’s Treasury Bill auctions has been particularly volatile lately and sometimes well below 100%.

On the external side, while the IMF program could boost foreign investors’ confidence, supporting the government’s capacity to roll-over its December 2017 Eurobond ($193 million or 1.4% of GDP), the existence of arrears may dampen their appetite. In case the government of Gabon is unable to tap the markets, it could rely on its financial aid and its cash deposits at the BEAC, which reached 2.6% of GDP at the end of 2016. It remains uncertain, however, whether these financing options will be sufficient. Moreover, the precarious state of government buffers following the oil shock also increases uncertainty with regard to the government’s medium-term strategy for refinancing debt payments ahead of principal payments that will average 2.5% of GDP (estimate) annually from 2022 onwards